Reference: 10-14
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 55

Multiple Choice

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.
-Horn Corporation is considering investing in a four-year project. Cash inflows from the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200; Year 3, $2,400; Year 4, $2,600. If using a discount rate of 8%, the project has a positive net present value of $500. What was the amount of the original investment?

• A)$2,411.
• B)$1,411.
• C)$7,054.
• D)$8,054.

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Definitions:

Simple Interest

A method to calculate interest charges on a loan or investment based on the original amount (principal) and the interest rate, but the interest does not accumulate or compound.

Maturity Value

The total amount that will be received by an investor at the end of a bond's term or a deposit's duration, including both the principal and interest.

Term Deposit

A banking term for a fixed-term investment held at a financial institution where money is locked in for a certain period of time, earning a specified interest rate.

Simple Interest

Interest calculated only on the principal amount, or original sum borrowed or invested, without compounding.